Amazon's zero federal income tax bill last year

There's been a lot of press covcrage recently of the fact that Amazon paid zero federal income taxes last year, despite earning $11 billion in profits (as per its financial statements). I've been too busy with teaching and other work to take a close look at this story, but I know enough about the general issue to have realized that it doesn't tell us anything definitive prior to considering how exactly Amazon got there.

Now, however, Matthew Yglesias has done me the favor of explaining how Amazon got its taxes down from over $2 billion (had it paid 21% on $11 billion) to zero

If this had happened in 2017 or earlier, net operating losses (NOLs) might have been the lead suspect, at least before one actually examined the evidence. Amazon had big losses for years, and there's absolutely nothing wrong if a company (genuinely) loses $11 billion in Year 1, then earns $11 billion in Year 2, and pays no Year 2 tax by reason of the NOLs from Year 1. But ironically, the 2017 act effectively presumes that there would be something wrong here, as it limits NOL deductions to 80% of current year profits. This was presumably directed at optics, more than at substance, although note that the disallowed excess NOLs can be carried forward indefinitely.

Yglesias finds three main causes in the record for Amazon's zero tax liability. The first is research and development (R&D) credits, which he notes get wide academic support, because research may yield positive externalities.

The second is temporary expensing for investing in equipment, which he notes is more controversial than R&D credits, but also gets some support across party lines. But I'd add two points here. First, expensing makes more sense when one is doing more than the 2017 act did to limit the tax benefit from effectively pairing it with interest deductions, which can cause debt-financed investment to be better than exempt. Second, there may have been a temporary transition effect insofar as, in 2018, Amazon was combining expensing for new equipment with continued depreciation for past years' equipment. This overlap from the shift between regimes would be expected to diminish in future years as expensing remains in place. And if equipment expensing is indeed allowed to expire as currently scheduled, then in the first year after the expiration Amazon's tax liability, relative to reported profits, might be unusually high (all else equal), by reason of the opposite regime shift.

The third cause for Amazon's zero tax liability, despite its $11 billion in reported earnings, is that its surging profits, by driving up its stock price, increased its deductions for paying stock-based compensation to its executives. Yglesias explains why allowing the deduction may make sense from a corporate income measurement standpoint, leaving aside the corporate governance issues that may be associated with very high executive compensation, but I'd add one more thing. The $1 billion in stock-based compensation that he reports as having been deducted by Amazon presumably DID lead to significant tax liability on the executives' part - indeed, one would presume, at a tax rate that was generally well above Amazon's 21 percent corporate rate. So the paid-out $1 billion in profits was indeed taxed to someone, and perhaps at more than the U.S. corporate rate, unless there were tax planning machinations at the individual level.

Insofar as this $1 billion was taxed by the U.S. at the individual level at a rate above 21%, I'd view that as an entirely adequate substitute for Amazon's being directly taxed on the same value.